[SINGAPORE] Amid one of the steepest equity sell-offs in years on Wall Street, the more adventurous investors may be tempted to “buy the dip”, but equity analysts are advocating a risk-off strategy and a shift towards defensive plays instead.
“For now, we continue to caution against prematurely buying into market weakness, especially in the US,” said Philipp Lienhardt, head of equity research at Julius Baer.
In fact, he recommends that any short-term strength in US equities could be an opportunity to sell, and further diversify into other markets.
“If you are a speculative trader, this is a clear signal to cut your losses and preserve capital. The trend is your friend – and currently, the trend is pointing downwards,” Koay said.
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But he added: “If you are a long-term investor with no near-term liquidity needs, this is a risk you should have been prepared for. Uncertainty is part and parcel of equity investing.”
Indeed, there is an abundance of uncertainty brought about by the tariffs.
Just recently, on Mar 28, Singapore’s benchmark Straits Times Index (STI) crossed the milestone threshold of 4,000 points for the first time in its 59-year history.
But a week later, the STI on Friday (Apr 4) tumbled 3 per cent to 3,825.86 points, a day after US President Donald Trump unveiled a tsunami of reciprocal tariffs on the world.
The tariffs have triggered a massive sell-off in global equities markets. And the US market has been the worst hit.
Some US$5.4 trillion was wiped off the market value of the S&P 500 index in the two sessions following the announcement – making it the worst meltdown since the pandemic hit the United States in 2020.
A surge in inflation looks to be inevitable, as higher costs of imported goods are passed on to consumers. Global supply-chain disruptions could also lead to shortages of certain goods, which would push prices higher.
A Fed dilemma
The US Federal Reserve previously raised interest rates to tackle inflation – by making borrowing more expensive to reduce consumer spending.
But blowback from the tariffs could lead to slower economic growth. And market watchers believe that rate cuts could follow, as higher rates would exacerbate a slowdown.
“While still unclear, potential Fed rate cuts could compress net interest margins (NIMs) faster than anticipated, pressuring net interest income (NII),” said Thilan Wickramasinghe, head of research for Singapore at Maybank Securities.
“On the other hand, lower rates may drive higher fee income, particularly in wealth management. This may provide some offset to NII decline,” he added.
DBS, South-east Asia’s largest bank, was the biggest loser on the Singapore bourse on Apr 4, falling 4.9 per cent or S$2.22 to close at S$43.30.The other two banks on the STI – UOB and OCBC – declined 3.9 per cent and 2.8 per cent, respectively.
DBS Group Research said in a note that the negative reaction on banks was due to higher expectations of a Fed rate cut and softer NIM.
“UOB may see more moderated loan growth concerns with its 25 per cent exposure to affected Asean countries,” the research team added.
Defensive plays
But there might be some winners yet.
For one, market watchers say that despite an expected negative impact overall, Singapore equities could outperform its regional peers as its 10 per cent tariff hit is the smallest.
“Of course, the secondary impact from a global growth shock needs to be watched. However, we see a silver lining from Singapore’s fiscal health, which gives dry powder to cushion the blow,” said Maybank’s Wickramasinghe.
He added: “Singapore may likely remain a destination for safe-haven flows, and projects such as the Johor-Singapore Special Economic Zone could become strategic advantages in garnering share in supply-chain relocations.”
Also, the potential of interest rate cuts could provide some tailwind for the real estate investment trusts (Reits).
“A falling rate environment could be a boon to Reits, especially those with domestic exposure,” noted Wickramasinghe. Maybank’s top picks for the sector include CapitaLand Integrated Commercial Trust (CICT) and Frasers Centrepoint Trust.
Meanwhile, DBS favours Reits with greater exposure to the US and Singapore over those that are more exposed to Asian markets that will be more affected by the tariffs.
For example, the research team said it would prefer CICT, Mapletree Industrial Trust, Keppel Reit and Digital Core Reit over other Singapore-listed Reits such as Daiwa House Logistics Trust and Mapletree Logistics Trust.
Outside of Reits, DBS believes companies that are focused on the domestic market – and least exposed to global trade – should also outperform. These include Sheng Siong Group (SSG), Raffles Medical Group and ComfortDelGro Corp.
By the same token, the research house said technology companies with “local-for-local manufacturing” – such as Grand Venture Technology and UMS Integration – are better positioned for tariffs over those with higher export share.
Those in the consumer staples sector, such as DFI Retail Group and SSG, are also seen to be more resilient to the tariff-led uncertainties than those with higher exposure to regional consumption and discretionary demand.
Maybank also believes that likely winners could emerge from some cash-generating sectors.
“Industrials have strong bottom-up growth drivers,” Wickramasinghe said. “ST Engineering (STE) is benefiting from a global upcycle in defence spending, plus corporate restructuring could further optimise capital returns; (while) Sembcorp Industries has significant earnings visibility driven by contracted utilities, while also enjoying energy-transition growth.”
He added: “Defensive cash flows and limited US export exposure should benefit Singapore Telecommunications (Singtel).”
CGS International analysts Lock Mun Yee and Lim Siew Khee said: “We reiterate our risk-off strategy in the near term, preferring stocks with more certainty in earnings, such as Reits and high dividend yield plays.
“We advocate investors to go for large-cap defensive names such as Singtel, STE, CapitaLand Ascendas Reit and Keppel DC Reit.”
With earnings season just around the corner, investors will be eager to hear from companies regarding the extent to which they may be able to mitigate the effects of the announced tariffs, including via price increases, rerouting supply chains, and reducing the cost base.
“However, the most important impact for companies will likely be the net impact on demand,” said Julius Baer’s Lienhardt. “Beyond the downside risks to earnings estimates, valuation multiples will likely remain under pressure as long as the uncertainty persists.”
